Business

Facebook and Google are destroying bad online ads, which is great until they own the world

The world of online advertising remains split: there's the Wild West and then there's the corporate dystopia.

In the wild west, dozens of shadowy firms churn out annoying two-bit ads for a quick buck; fake news sites feed off ad exchanges not entirely unlike those that serve the country's paper of record; Russian cybercriminals routinely bilk the world's biggest brands out of millions through ad fraud.

Then there's the corporate dystopia, in which the vast majority of online ad dollars are vacuumed up by two companies: Google and Facebook.

For a while, the two worlds coexisted peacefully, but it appears that time is coming to an end. There are signs that the Silicon Valley giants have had about enough of the shadiness of their lesser peers (though neither is entirely blameless or immune themselves).

After years of paying lip service to the idea of a cleaner, more user-friendly online ads space, those companies and other major platforms are each flexing their muscles in ways that could actually compel widespread change—blocker-equipped browsers, algorithmic vetting, and machine learning.

Sounds great right? Who wouldn't love to see fewer terrible ads? Well, without the Wild West, we're left with just the corporate dystopia. And their show of force has already rattled publishers and ad tech firms, which are wary of the duopoly's intentions and massive power.

Whatever happens, there's little chance the crackdown will be bloodless.

Death by duopoly

In the last three months, about $0.70 out of every dollar spent on online advertising went to either Google or Facebook, according to a report this week from Pivotal Research Group.

Around half of the remaining $0.30 is (separately and loosely) estimated to go to a collection of minor platform players ranging from Snapchat to Twitter to Amazon.

Things get a bit messier in the race for the nickel and dime left over after that. Elbowing over that sliver of the market are hundreds of entities—publishers ranging from the New York Times to BuzzFeed to a rogue's gallery of fake news sites. Also in the mix are ad tech middlemen from targeters to re-targeters to robotic exchanges, and even mafia fraudsters.

Just look at this mess. These are all the companies that are playing some role in this.

The amount of money spent on digital ads is still growing quickly, but headed just about entirely to the corporate dystopia. Some estimates say as much as 99 cents of every new dollar in ad generation is gobbled up by Google and Facebook.

The stranglehold on growth is evident in the rapid rate at which their slice of the pie is expanding. In just the past two years, the duopoly's share has grown from 64 percent to 71 percent, according to a report from Pivotal Research Group.

That may not sound like a massive bump on its face, but consider that each 1 percent of growth is equal to about $830 million.

What leftover is a situation in which companies are chasing the scraps. Venture capital funding for ad tech companies—the shorthand for the sprawl of esoteric businesses that orchestrate the buying and selling of digital ads—shrank substantially last year as did the number of business deals in the space.

They can't entirely blame Google and Facebook. Pivotal advertising analyst Brian Wieser said ad tech's woes have more to do with their business model than competition from Google, however.

"That's not the cause of ad tech's weakness by itself," Wieser said. "Those are not very good businesses. They're mostly commoditized."

Either way, noted venture capitalist Fred Wilson predicted in January that it would be virtually impossible to find funding for an internet advertising business this year.

"The ad:tech market will go the way of search, social, and mobile as investors and entrepreneurs concede that Google and Facebook have won and everyone else has lost," Wilson wrote.

Terry Kawaja, founder of investment bank Luma Partners, predicts that nine out of 10 current ad tech companies will disappear without successful exits.

Publishers are in a similarly grim position. Most legacy magazines and newspapers still rely on print for the bulk of their ad revenue, and their online share is becoming even more marginal as their audiences shift from desktop to less lucrative mobile.

Layoffs have swept major outlets in the past weeks, including Time Inc., HuffPost, and Vocativ. Many of these companies are frantically doubling down on video production, through which they can sell more expensive ads.

Blood in the water

Despite its comparatively tiny stature, the free-wheeling world of open-web ads has long been a thorn in the side of Google and Facebook.

Annoying, clunky, and intrusive ads drive people to ad blockers, which Google currently pays a reported $25 million to circumvent. They also force its Chrome browser to compete with ad-free rivals that are popular in Asia, such as Alibab’s UC browser. For Facebook, these ads bog down load times for outside links and thus hamper user experience—something the company recently cracked down on via an algorithm tweak.

They're not alone in their distaste for the seedier elements of digital advertising. Pretty much everyone in the industry seems to agree that a certain segment of bad actors are harming the reputation of the space as a whole.

But it now seems major platforms are finally doing something about it.

The first salvo came when news broke that Google's Chrome browser would soon come equipped with an ad blocker enabled by default.

The feature will filter out ads based on the quality standards set down by the Coalition for Better Advertising, an industry group over which Google is said to have an enormous sway.

The move was cheered by some in the industry, but most remained wary of the search giant's goodwill.

It could have big consequences. AdBlock Plus, the world's most popular ad blocker, claims to boast around 100 million active users; Chrome has well over a billion on both mobile and desktop (of course there's overlap).

Wieser, however, downplays how much impact it will ultimately have on publishers. It may drive prices for higher quality ads up, he says, but media companies will ultimately be competing on the same playing field.

"It could be argued that publishers have engaged in a race to the bottom approach and supported these bad ad units because of the pressures Google and Facebook have placed on the industry," he said. "But it didn't need to be that way. I'd argue that if everyone is given an equal opportunity to sell non-bad ads, it doesn't make much difference."

The social network has remained relatively opaque about the particular types of ads that would lead a site to lose priority in Facebook's all-important News Feed. It did say that pop-ups, interstitials (those screen-hogging ads that are sprung on you between page loads), and otherwise malicious or deceptive ads would be counted against publishers, and that it would consider the ratio of ads to posts.

Seemingly minor tweaks to Facebook's code can have make-or-break implications for media organizations, which typically rely on the 1.5 billion-user-strong platform for a vital chunk of their traffic. When Facebook rolled out its first major anti-clickbait adjustment in 2014, it managed to pretty much stomp out a whole cottage industry of exclamation-point-happy screaming headlines.

The incentive to clean up advertising could prompt a similar gravitational pull away from certain types of ads that are currently commonplace. Some publishers say they are already beginning to see the flow of visitors from the platform tank.

Like Google's new filter, the vetting is all handled by artificial intelligence, which Facebook has said is trained to recognize patterns in pages with suspect ads.

One prominent ad tech executive said the automated nature of these efforts was what worried him most. Stricter policies might sound fine in theory, this person said, but it's almost never perfectly translated into code without collateral damage.

While Safari accounts for a relatively small share of the overall browser market, it is nonetheless, of course, the default on popular Apple products, and there's always a chance the company could expand the feature to mobile. With less skin in the advertising game, Apple opted for an arguably stricter crackdown, considering that autoplay ads are some of the most common on the web and tracking is ubiquitous.

Apple prompted a similar bout of industry panic when it said it would start allowing third-party blockers on the mobile version of Safari in 2015. That worry turned out to be a bit overwrought; industry watchers may have underestimated just how much of a barrier the need to actually switch on a setting is to the average person, and mobile ad blocking remains relatively insignificant in the United States.

But the prospect of a mobile form of the new filter is even more threatening in that the blocker would be the default state, and Apple's software can no doubt outperform a small-time developer app.

Is this really, actually a doomsday scenario?

The media industry has for years been wringing their hands about an apocalyptic reckoning in one way or another.

If it wasn't Apple's ad blocking acceptance, it was Facebook's Instant Articles, Facebook stressing friends over news, or Facebook shutting outlets out of its trending topics (Facebook is a bit of a preoccupation.)

Each of those threats has certainly contributed to a slow-burn decline of the media business that's killed off publications, made mass layoffs a regular occurrence, and gradually drummed out an experienced workforce in favor of cheap, young hires.

But do the events of the last few months actually represent the arrival of a sea change of some sort?

Wieser says it will be less of a tipping point and more of an exponentially growing slow build.

"The economics of not being Facebook and Google just get worse with every passing year," he said."It's harder to grow. You get less of the economic output you produce."

Feeling the squeeze, publishers are putting rivalries aside and banding together to create potential alternatives. Earlier this year, a host of premium brands including the New York Times, Conde Nast, and NBCUniversal announced an ad partnership that includes shared sponsored content and user data in addition to display ads. Groups of outlets across other categories are following suit.

Some of the biggest firms in ad tech are following a similar game plan. AppNexus, MediaMath, and LiveRamp launched a consortium last month that pools their media buying capabilities into a force that may rival the duopoly.

Such tight-knit alliances between rivals are unprecedented in the industry, but then again, so is an all-consuming duopoly money pit.

Mashable
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